We find ourselves in yet another situation where there are stories about banks struggling. One way of looking at this is to look at the share price of Deutsche Bank.Yes a price of 8 Euros is better than the 5 Euros of the a couple of years or so ago. But it is a long way short of the over 14 Euros of February. Hopes back then for the economic recovery and maybe of higher interest-rates both of which would be good for business have been replaced by worries. Of course in many places it operates we do have higher interest-rates and even the Euro area is now in positive territory for them.
Another factor undermining them is that even the ECB seems to be worried as this from Bloomberg last week shows.
The euro area’s top banking supervisor has told individual lenders recently that it expects restraint in variable pay and dividends as it’s concerned the energy crunch could result in a wave of defaults, the people said, asking not to be identified as the discussions are private.
Not that private then.
Also this morning the ECB has warned about the housing market.
As highlighted in the ECB’s May 2022 issue of the Financial Stability Review, euro area nominal RRE price growth has accelerated sharply since 2020 to reach the highest growth rate of the last 20 years amid robust annual mortgage lending growth. These developments have led to concerns about increasing RRE price overvaluation and household indebtedness. ( RRE = Residential Real Estate)
That is not entirely reassuring for firms with balance sheets full of mortgage lending.
Bank mortgage loan portfolios exceed 200% of banks’ CET1 capital in most euro area countries, and loans to companies engaging in real estate activities are also of significance in several of them. Finally, real estate properties are a very important form of storage of wealth for households, worth more than 200% of GDP in most euro area countries.
Also the effort to reassuring on commercial property rather crumbles if you are able to translate what central banks usually mean by “challenging”
At the same time, commercial real estate (CRE) markets seem to be stabilising after a sizeable price correction during the COVID-19 pandemic, but conditions remain challenging in some market segments.
Monte dei Paschi
Whilst being involved in Monte Paschi’s capital issues is one of high job security it is also one likely to prey on your nerves. None of the above will have helped and any mention of bad loans will make your short collar feel even more itchy. From Bloomberg last week.
ECB statistics released Friday show some early warning signs. The aggregate share of so-called stage two loans, where a borrower’s prospects have worsened, continued to rise. They reached 9.7% of total loans in the second quarter, up from 9.3% three months earlier. Still, the industry’s bad loans fell overall, while its capital levels were stable.
Those who have followed the saga may be wondering what happened to the Unicredit bid?
ROME, Sept 24 (Reuters) – Italy’s Treasury is confident it will be able to announce a deal to sell selected parts of state-owned bank Monte dei Paschi (MPS) (BMPS.MI) to rival UniCredit (CRDI.MI) next month, four sources close to the matter told Reuters on Friday.
That was from last year and as I pointed out in the 25th of October things were slip-sliding away.
Anyway another 2.2 billion Euros were added to the Unicredit demands via deferred tax assets as we follow the familiar path set by the Irish banking collapse and bailouts.
What is happening this time around? From the Financial Times.
Chief executive Luigi Lovaglio, a turnround specialist appointed this year by Mario Draghi’s government to revamp and privatise MPS, said in the summer that the Tuscan lender would launch a cash call partially backed by the Italian Treasury to restore capital buffers.
There are already a couple of main themes in play here of which the most basic is the privatisation of profits but socialisation of losses as we note the Italian taxpayer owns 64% of the bank. Also they way that the fingers of Mario Draghi are all over this highlighted by the rules for Italian banks being called the Draghi Laws and onto his time as ECB President and then Prime Minister of Italy.
Even with the Italian Treasury happy to commit the taxpayer to yet more losses the numbers are rather short.
The Treasury, which has owned a controlling stake in MPS since a 2017 bailout, can only underwrite an amount, up to €1.6bn, that is proportional to the private investors’ uptake.
“According to the structure of the operation, the Treasury can contribute up to 64 per cent of the capital increase,” said one banker, adding: “For every euro committed by private investors, the Treasury can invest €1.78, so if investors commit €400mn, for example, the Treasury can put in €712mn and the cash call would raise a total of €1.2bn and fall short of the target.”
As you can see they only need private investors to put in 900 million Euros and the job is done. If you have not followed the saga it must seem a decent deal so let me remind you of the history here.
Via Reuters we can tally up the tale of woe that we looked at on the 13th of August 2021.
JANUARY 2008 – MPS announces a 5 billion euros rights issue, a 1 billion euro convertible financial instrument called Fresh 2008, 2 billion euros in subordinated, hybrid capital bonds and a 1.95 billion euro bridge loan to fund the Antonveneta deal.
Next up was the Italian taxpayer.
MARCH 2009 – MPS sells 1.9 billion euros in special bonds to Italy’s Treasury to shore up its finances.
Very special I would imagine. Then everyone had to divvy up.
JUNE 2012 – MPS asks Italy’s Treasury to underwrite up to another 2 billion euros in special bonds.
OCTOBER 2012 – Shareholders approve a 1 billion euro share issue aimed at new investors.
Next was time for some sleight of hand as shareholders transferred cash in the one piece of good news Italian taxpayers have gad in this saga. Unless of course their pension fund was an investor as it would be robbing Peter to pay Paul.
JUNE 2014 – MPS raises 5 billion euros in a deeply discounted rights issue and repays the state 3.1 billion euros.
More! More! More!
JUNE 2015 – MPS raises 3 billion euros in cash having upped the size of its rights issue after posting a 5.3 billion euro net loss for 2014 on record bad loan writedowns. It repays the remaining 1.1 billion euro state underwritten special bond.
Next we were about to see the Euro boom so that would make it better, Right? Right?
Rome spent 5.4 billion euros in 2017 to rescue the loss-making Tuscan bank, which now needs up to another 2.5 billion euros, giving fresh urgency to efforts to cut Italy’s 64% stake as agreed with European Union authorities.
Or as the Financial Times puts it this morning.
According to several bankers in Milan and four investors in London, investors have little appetite to buy into the rights issue for reasons that go beyond the current negative market environment.
Surely not?”
They cited uncertainty over the bank’s privatisation path, its poor performance, its stress test record despite multiple capital increases over the past decade, and potential litigation costs which though reduced, still exist.
Comment
It seems that there are three certainties in life. Death, taxes and Monte Paschi needing more capital. It is perhaps the clearest case of my argument that we should have let some banks fail so that we could both see the scale of the problem and then move forwards. Instead it is stuck in the mud of all the past lies and losses. It has been everywhere including the taxpayer, investors and other banks. Today’s share price of 23 Euros relates to an equivalent of around 880,000 Euros at the peak pre credit crunch if my chart is any guide.
So we have perhaps the clearest case of “The Precious! The Precious!” in existence and the irony is that with the interest-rate rises banking should be in better shape. Although there are risks for the mortgage book and the enthusiasm for holding Italian government bonds is not going well. It would be much easier I think to raise capital via a bond although of course it will not be cheap.
The theme song to all of this was written by the Average White Band.
Let’s go round again
Maybe we’ll turn back the hands of time
Let’s go round again
One more time